Call Us: 972-724-2881
Written by
Noel Cookman

How NOT to Determine Equity and Divorce Buyouts in Real Property (or How to Lose $30,000)

Published On 
February 27, 2019

A customer was on the way to court while I was reviewing several orders and requests and motions. I found that the following had been stated as factual and consequential in establishing value and equity in a marital residence which was to be awarded to my customer subject to her refinancing its debt into her own liability and producing a buyout (financed) as well. (Numbers rounded for simplicity).

First Amended Inventory and Appraisement of Opposing

Petitioner submits this inventory and appraisement of all assets and liabilities, community and separate estates, as follows:

Community Estate of the Parties
Real Property
Street address: [redacted]
County of location: [redacted]
Legal description: [redacted]

Current fair market value (as of date):             $450,000.00
Current balance of mortgage (as of date):     $  50,000.00
Other liens against property:                             $            0.00
Current net equity in property:                          $400,000.00

Source(s) of value: Real Estate Comp and Zillow

Before you read my letter to the divorcing customer, can you see the two major issues with the above paragraph?

Dear Divorcing Customer:

This is SUPER SUPER SUPER important. Three super important issues:

  • The Buyout compared to The Total Buyout (Owelty in Texas)
  • Calculating Value, and
  • Equity in Property.

The Buyout

Please do not let the court (in transcripts, written orders, agreements, whatever) memorialize the actual Owelty lien (or total buyout in states other than Texas). In fact, do your best to prevent the stating of the buyout to your husband as an Owelty. Let me (in consultation with you) determine that Owelty amount (or total buyout in states other than Texas).

Here is the proper way for the court to rule (or parties to agree) so that your financing can be accommodated:

Net buyout to husband shall be $______, final OWELTY (or total buyout in states other than Texas) amount to be determined by lender (Noel Cookman).”

The divorce decree will cite the actual, final and total OWELTY amount (or total buyout in states other than Texas). And, I will review for underwriting before it is finalized.

For example – AND THIS IS SUPREMELY IMPORTANT – if the net buyout amount to your husband is $50,000 and you have cash needs (for debts, legal fees, personal cash, etc.) of another $50,000, the court transcript (and this would apply to a Mediated Settlement Agreement or any PRE-Decree orders or agreements) should state what I said above – that the “Net buyout to husband shall be $______, final OWELTY (or total buyout in states other than Texas) amount to be determined by lender (Noel Cookman).”

But, the Divorce Decree would state: Husband’s Owelty (or total buyout in states other than Texas) is $100,000 TO BE DISBURSED AS:

Husband                                   $50,000
Visa                                          $10,000
MasterCard                               $10,000
Attorney Trust Account        $30,000 (to pay legal fees and/or pass through to you)

The actual language will be a little more appropriate for decree language (in Texas it would be “The Court finds it necessary to impose an Owelty of Partition on the entirety of the property….blah, blah, blah.”) BUT the unique language will insert that phrase “TO BE DISBURSED AS.”

It is crucial that certain language be used or left out of each document. If the court sets the Owelty (or total buyout in states other than Texas) (in the above example) at $50,000, it will be difficult, more expensive and maybe even impossible for you to access the additional $50,000. There is no downside to any party, any person, any entity by doing it this way. No taxation will be triggered for your husband (but, I would want him to ask his tax preparer for a professional opinion on that as I am not a tax pro – I have simply checked it out with my tax professional).

In other words, leave out mention of Owelty in all documents except the final decree.

Call me from court or wherever if you want – it’s THAT crucial!

I realize that you are dealing with all sorts of issues in the trial. This one may seem small by comparison. But, in the above example, it’s only $50,000 small. ?

Remember: Neither the judge nor any officer of the court will be lending their money and assuring that the loan will close and that your ex-husband will be paid. NONE. I do. I can turn their white paper into green money. But, they have to put on the white paper what I advise. If they do, everyone gets paid.

Calculating Value

The documents state that the parties are relying on “Real Estate Comp and Zillow” to determine value.

The court needs to know that neither a realtor (through a “real estate comp” or a CMA – Comparative Market Analysis) nor Zillow can provide a reliable or professional or accurate statement of “opinion of value.” At best these are rough markers or starting points. But, they are not statements of value.

I cannot state this strongly enough: The only value that a lender accepts is that value which is reported by an appraiser on an appraisal which the lender alone has ordered through a very legally prescribed (Dodd-Frank Act and its precursor the HVCC - Home Value Code of Conduct) process. A judge cannot state value. A court and countless other appraisers cannot provide a reliable, underwrite-able statement of value.

This is only important if a person or an entity is advancing mortgage funds in the transaction. If neither side care about financing and will never need it, for all I care, they can yank a kid from off the street to given them a report of value. They can do what they want in that regard.

To restate this: If financing is required, ONLY ONE APPRAISAL COUNTS – the one which the lender orders and reviews and accepts.

Equity in Property

The documents state that the following calculation for “net equity” in the property:

Current fair market value (as of date):             $450,000.00
Current balance of mortgage (as of date):     $  50,000.00
Other liens against property:                             $            0.00
Current net equity in property:                          $400,000.00

I assure you that the other side would love this calculation but would be unwilling to buy you out at these numbers. This is not a calculation of “net equity.” At best, it is a calculation of “gross equity,” and maybe not even that.

Here’s why: the cost of the transaction ALWAYS diminishes net proceeds (or what might be meant by “equity”).

At the very least, here is a calculation of “net equity.”

Current fair market value (as of date):            $450,000.00
Current balance of mortgage (as of date):     $  50,000.00
*Transactional Costs of Sale:                          $ 30,553.00
Current net equity in property:                          $369,447.00

*Transactional Costs
Realtor (6%)                              $27,000.00
Title Policy                                 $  2,803.00
Typical Seller costs                  $     750.00
Not even counting seller-paid closing costs as incentives or tax prorations.
The only way for the initial calculation of “net equity” to produce “net proceeds” (a check deposited into the sellers’ account) is if someone showed up on your door-step with a suitcase of green money ($450,000 to be exact) and said “sign the deed over to me and I am trusting you to pay off the mortgage note.” That’s really an illegal transaction at worst and an uninsurable one at best. Moreover, I think you would probably smell something fishy and refuse the deal. It just doesn’t happen.


One more word about courts and judges

No judge can determine value. If you are searching for some fact to embolden you when challenging a court’s judgment in setting value – such as taking two varying appraisals and “splitting it down the middle” – understand this…

Only the person or entity who is advancing funds on a property can determine value. Only if/when the judge is purchasing a property with his/her own cash OR lending his/her own money (under federal and state laws governing real estate lending) would they have the rational and reasonable right to determine value. Otherwise, they have no standing whatsoever to set value.

I suppose the smart-ass way of saying this in court would be to tell the judge who insists on setting value “GREAT, so YOU’RE lending YOUR money on this deal. Awesome.”

Since you wouldn’t do that – you being the more prudent between the two of us – I suggest that we all work to get these facts circulated to every judge in the country who hears divorce cases or cases that otherwise deal with the value of a property.

Thank you.

Sign Up Today

Join our Newsletter Mailing List today to stay updated on the best information for Divorce Mortgage!

By submitting this form, you are consenting to receive marketing emails from: . You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact
Copyright ©2020 The Mortgage Institute